Welcome to Wärtsilä CEO strategy call. I am Hanna-Maria Heikkinen, and I am in charge of investor relations. Today our CEO, Håkan Agnevall, will discuss some of our key long-term opportunities, and after Håkan's key messages, there is a possibility to ask questions. As a reminder, we will host a pre-sale call on June 18 together with our CFO, Arjen Berends. Let us leave the questions related to recent trading and detailed financials to that call. If you have a question, please use raise your hand functionality in Teams. In the case you do not have the possibility to use raise your hand functionality, you can also send an email to me. Please, Håkan, time to start.
Hello, everybody, and nice to have you online again for some dialogue on a Friday on my favorite topic, Wärtsilä. I am sure it is going to be your favorite topic as well. I just came from Nor-Shipping. As you probably know, it is one of the really big fairs and get-togethers in the marine industry in Norway, in Oslo, and collecting people from all over the place. I will talk a little bit about my reflections on Nor-Shipping. I start like I normally do by giving my overview of the industry and where we are heading, so to say, and then let us see if it takes 15 minutes, and then we move into the Q&A session. If I start overall, our strategy is about shaping the decarbonization of energy and marine. We also say that this is a transformation that will take decades, not years, but decades.
It is clearly there, and I would argue it is accelerating. We also have the saying that green is not black or white. There are no single solutions. We need multiple solutions, and of course, the exciting for Wärtsilä is that we think we have some of the major solutions in the decarbonization journey going forward. It is going to be a lot about fuel flexibility and fuel efficiency, and it is going to be a lot about balancing power on the energy side. We continue also, of course, a service business. As you know, more than 50% of our revenue is services, and it is also a significant contributor to our growth and to our profitability. It is still the same narrative. You also know that we recently launched our updated financial targets and when we separated out storage.
For energy and marine combined, we are talking about 5% annual organic growth and 14% EBIT. On storage, we talk about low double-digit annual growth and organic growth and 3%-5% EBIT, so to say. That still holds. If I start with marine, then to give a little bit of industry perspective and then move over to energy and energy storage. On the marine side, clearly major events that taken place quite recently, MEPC 83. The vote was made, U.S. stepped out, but China, Europe, India, Brazil, many countries voted for, and it is now coming for formal decision in October. The decision has still not been made. But if the decision is made, it is certainly a milestone in the industry.
I would say for the world, because if this goes through, it will be the first time that we will have a global carbon fee, carbon emission fee, for the marine industry. I would say that marine industry will probably be one of the first industries to actually have a kind of global carbon emission regulation. Some argue that it is too little, too late, et cetera. Yes, it is not perfect. It is complex framework. Because of its complexity, there is still a lot of interpretation to be made. But it is clearly taking a step in the right direction when it comes to decarbonization, and it will support Wärtsilä strategy. One of the conclusions that we have been making is that, and you need to simulate a little bit, but basically the cost for operating on HFO will basically double until 2035.
We said before that with the EU ETS and EU FuelEU Maritime, the cost will double up to 2030. But now with IMO, globally, it will double to 2035. I think that is also under the framework. There will be increased interest in biofuels. But let us see how it evolves. On a disappointment side from us, we would have liked to see more formulation on carbon capture, but that is a longer term discussion now. The next report is in 2026, and let us see how we take it almost to that. I would say that when I talk, as I did at Nor-Shipping with many of our big customers, they are clearly thinking around this and developing their strategy. There is not only one strategy. Different players are going with different solutions. But it is clearly on top of many people's mind.
When we look at the U.S., the tariffs, we look at Section 301. If you look at Section 301, which was this U.S. piece of taking actions and imposing pretty hefty fees on Chinese-built vessels and vessels operated by the Chinese, I think that was finally watered down in the final version. I think the industry will maneuver a little bit around it. Then, of course, we had the currently ongoing discussions on the so-called SHIPS Act in the U.S., where this is resurfacing as a topic. Let us see how that plays out. That is still too early to have a view on. But the discussion on the fees there is still live, so to say. Of course, this regulatory tariff, it creates uncertainty. I think that is the major impact. U.S. shipping is less than 10% of global shipping.
From that perspective, as we know, there are no major shipbuilders or ship owners in the U.S. So from that perspective, limited impact, but it does have some impact on uncertainties. Yes, Clarksons data are coming down, but as we highlighted in our Q1, if you look at the Clarksons forecast for the coming two or three years, it is still clearly above the 10-year average. We still see our demand side holding together, driven by our core segments, cruise, ferries, and specialty vessels and offshore, and also by the continued decarb journeys, so to say. Of course, if the indirect impact of the tariffs is that the whole world economy slows down, of course that will impact shipping and it will certainly impact Wärtsilä as well. But so far, we see a demand side that, on the marine side, that is holding together fairly well.
Also on the services side, developing very positively. You have seen in our reports the famous book-to-bill, which we track in all four disciplines, everything from services and agreements or spare parts to agreements, et cetera. It is still developing in a positive way. I think our strategy of moving up the service value ladder is still working out very well for us. So that is encouraging. On the technical side, two major things. Recent things is, of course, we are now having our first order for ammonia engine with Eidesvik. It is a PSV, offshore service vessel with a Norwegian operator, and that will be taken into operation in 2026. So that is big news. The other big news lately was the launch of our carbon capture. So we clearly see carbon capture as one big potential retrofit solution.
As we all know, there is about 100,000 big vessels out there in the world, and many of them will need to be retrofitted. We see carbon capture as one of the major retrofit solutions. So what we do have now as an extension of our scrubber business, we have a carbon capture device, and we capture 70% of the carbon at a reasonable energy penalty, so to say. Of course, we can continue the rate of capturing. It is more we start here and we see there is a customer interest for these type of capture rates. There we also have now a full commercial launch. We have had pilots with Solstad, another Norwegian customer. Now since this pilot has been very successful, we are going to full commercial launch. So those are the latest, I would say, on the marine side.
If we continue over to the energy side, as you all know, energy by this, we now talk about the thermal power plant business. Energy storage is separate. So we talk about energy. The demand side is certainly holding together. Actually, I would say both from base load but also on balancing. The U.S. is hot, not only from a temperature perspective, but also from a market perspective. We do see that the move to renewables continues, especially in the midsection of the U.S. and primarily driven by the affordability of renewables. As you know from the Wärtsilä narrative, as the share of renewables grows, you need balancing power. If you do not have it, you will have challenges. I think recent development in Europe and Spain has shown what could happen if you do not have a power system in balance.
I will not go into the details of the Spanish incident or whatever you want to call it. There is no single simple explanations. Those involved, they do very thorough analysis. But one clear factors in this complex equation is that there needs to be more balancing power in the Spanish net to keep it safe. So balancing power is here to stay, and it is here to grow as well. Then on the baseload side, we see activities in our strongholds, both in Asia and South America, and data centers. You know of orders in data centers in Europe. We are working intensely on opportunities in the U.S. So far, no concrete orders to report. We will certainly do that when we have the income paper, so to say.
But I can clearly say that there is a lot of activities, a lot of interest. But so far, no new orders to report on data centers in the U.S. Similar on the services side. It's the four disciplines performing well. Moving up the service value ladder works well for us also in energy, and it continues to move forward. I do think that we have a very good narrative and the balancing opportunities will play out as we go forward here. Then on storage and also on tariffs on energy. Yes, we are exporting engines from Finland to the U.S., and yes, they are now under the general tariffs in the U.S. versus Europe. But we see a pretty strong demand side in U.S. despite. We are transferring the tariffs to our customers. But in spite of that, we do see a continued strong market situation.
Then jumping to storage. I think storage is the Wärtsilä business that has been affected definitely by the tariffs because the market in the U.S. is still down. Now, the good thing is that we are not only depending on the U.S., we are strong in other countries like Australia, U.K., and others, but it's clearly impacting our business and on the order intake side. We had a very slow Q1. I think it's picking up a little bit on a global level, but U.S. is still very slow. The underlying fundamentals for growth is still there, but it's clear that the current U.S. situation is a lot of wait and see, so to say. I think that's a quick expose of where we are. On the demand side, in the last quarter, we guided positively, and we do still see our demand situation holding up.
So with that, I suggest we open up for questions.
Thank you, Håkan. So please, time for Q&A. The first question comes from Max Yates. Please go ahead, Max.
Hi. Good morning, both, or good afternoon. Thanks for doing the call. I just wanted to first ask about your capacity in Wärtsilä, because obviously there's some excitement about potential data center orders. We're seeing kind of big demand, whether people are talking about 10 GW, 15 GW a year. You would only have to win a small slice of that. But how much can you actually physically do? What does your capacity utilization look like? What could actually be the upside in terms of either gigawatts or value of orders you think you could realistically take?
Yeah. I won't go into the detailed numbers because that is kind of competitive information I don't want to give out. But just to give you, we have still room to scale. I think that's the key message. We are at about 70% of our technical capacity, and we can expand our technical capacity as well. I do think that we have capacity, then we should allocate that capacity wisely, so to say.
What is it? Maybe this is a bit unfair, but I'm a little bit surprised you haven't taken an order yet because the backlogs are so long at some of the large gas turbine players. Your solution is readily available. You can get it quickly. So what do you see in your mind as kind of has been the hold up? Is it a kind of reticence to maybe use engine technology versus turbines, or is there something in the product, or is it just a customer by customer negotiation?
There are a lot of, how should I put it, new players coming into this space. I think there is a common learning on how to contract in this space. So it's not related to demand. There is a lot of excitement and demand. But at the end of the day, you need to sort out the terms and conditions, and how are you going to finance it, and how are you going to set up the structure, et cetera. I think there's a lot of learning going on in this area. Of course, in the U.S., the first consideration of a data center customer is always to think about turbines. GE is a household name in the U.S., but we are eating ourselves in there.
So that's why I have an optimistic view on orders going forward, but I want to have ink on paper before we announce them.
Okay. Maybe just two more. We've seen a lot of pricing tailwinds in other larger turbines because of shortages of capacity. In some turbines, I think we've heard they've doubled in price in the last two years. Are you starting to see any change in pricing across the industry as a whole, because this stuff is being used for data centers, base load flexible power, but obviously it just increases utilization for the whole industry. So how's that feeding into your business, maybe more broadly beyond just data centers?
No, we see a little bit of the same tendency as well. There is good strong demand, and that is only good for pricing, so to say. Absolutely.
Okay. Just final one. I don't know whether you've had any kind of internal discussions on this Section 899, and how potentially that may affect your business from a tax perspective. I know it's very hard because we've tried to look at this to really understand it on a business by business, but from your sort of treasury department, any kind of first thoughts on how that could affect your business from what you've read and seen so far?
There are so many sections these days, and they vary by the day. The 899, which one is that? Help me here.
That is the repatriation of dividends and the sort of unfair tax policies from sort of certain regions in the U.K. If you basically have been paying to repatriate some of your profits from the U.S. and paying a lower tax rate in Europe. Yeah, that one.
On transfer pricing, and I will label it under transfer pricing. Way before this whole recent dynamic started, we have done some structured work on internal pricing because this is, as you point out, this is an evolving area globally. I think that we have developed a framework without going into this, quite technical, and I do not foresee a major impact on us, quite frankly.
Okay. I will get back in the line. Thank you very much.
Thank you, Max. The next question comes from Vivek Midha. Please go ahead.
Thank you very much, everyone. Good morning, good afternoon. I would like to follow up, please, on the thermal power plant business. In a related vein to what Max was asking, you clearly have better availability, given that asset utilization. If a customer wanted to place a new order now, would they be able to get delivery within a year? Is that the right way to think about it? What sort of lead times would you have? Thank you.
I think you should be looking at I do not know. Do you want to order one?
Why not?
Yeah. I think we will do a separate special effort for you, of course, Vivek. But to be serious, we are looking at lead times for 12 months and plus.
At 12 months+ already, despite-
Yeah.
Okay.
Yeah.
Okay. Understood.
Which is not too bad, consider some of our competitors and what they are offering.
Of course. Then I'd like to follow up.
Also, sorry, if I may. I said this before because sometimes this has triggered questions. As you know, sometimes when we take orders, we cannot announce them immediately. There is sometime because we need to, of course, follow our customers in this. Some customers, they want to make certain things public, and some customers don't want it. Because sometimes I get the questions, there are no press releases from Wärtsilä, so are you actually selling anything? I want to reiterate that messaging.
Understood. I'd just like to follow up on the more global picture within the thermal power plant business, because we've seen on the gas turbine side, of course, the U.S. is very hot. There's been good demand from other regions, too. We've seen it in East Asia, we've seen it in the Middle East, for example. I was wondering, what are you seeing more globally in thermal? Any sort of regions you could call out, what sort of trends you're seeing. Thank you.
Now, clearly East Asia, Southeast Asia, we do see a little bit longer, also South America. There are big auctions coming in Brazil. The latest auction now is sliding a bit, but there are some big opportunities in Brazil. Once the situation in Argentina stabilizes, there was actually an auction, but it was kind of canceled. South America, there are also interesting opportunities. I would highlight Asia, Southeast Asia, South America, when it comes to base load. On the balancing side, I would clearly highlight the U.S., broad stroke. Then you have on top of that, you have opportunistic camps up, in the stern countries, et cetera.
Understood. Thank you very much. Just finally wrap up. You commented again, you are confident around the cruise segment. We still see pressures on the U.S. consumer. Your latest discussions with your customers, how are they thinking about this? What is your view on cruise? Thank you.
I think when we talk to our customers and the big ones, they are still fairly optimistic. When they look at bookings for this year, bookings for next year, it looks good still, in spite of clearly what is happening in the U.S. So they are rather optimistic.
Brilliant. Understood. Thank you very much.
Thank you, Vivek. Like I said, our salespeople will contact you if you want to buy your own power plant. Next question comes from Sven Weier.
Yeah. Thank you, Hanna. Thanks, Håkan, for doing the call. First one is also on energy. Talking a bit about Germany, I mean, the plan is to add 20 GW of gas power capacity. I mean, we've talked about the turbine bottlenecks, right? I'm not so sure if the delivery potential is quicker for Germany, and some of these plants are going to be built in the next few years. Do you see there a place for engines or is this, if there are engines, they're all taken by MAN, or what's your position for the German opportunity? Thank you.
No, I do think we have ample opportunities also for Germany. I don't think it's a MAN captured market. I think, however, I'm also considering our history, and you remember, Sven, and others remember that we went through some tough projects in energy, and some of them were in Germany. I think energy has clearly strengthened our operational excellence and capabilities through the years. So we are clearly also looking at Germany. But it's important to find the right setups with the, is it going to be EPC or equipment? There are many practical aspects on that. Then also the whole topic of hydrogen readiness, how is that going to be defined? As you know, we are investing in hydrogen for energy and we made launches last year. So I think we are looking very closely at Germany.
Sounds good. I also wanted to follow up on cruise. I mean, when I look at the May Clarksons data, looks again very strong. So it seems people always go on a cruise. Was just wondering, I mean, how quick is the translation into your order book these days? Is it rather quick and do you see any, I know that your content per cruise vessel is already very high, but do you see scope of raising that even further?
So I would say normally a 12-month kind of timeline in that-ish, 12-ish months. I don't see any that we are introducing some, I mean, that could be a little bit on the scrubber, on the carbon capture side. I think the strong core component is still engines. It could be some bridge equipment, but that has also been traditional. So I do, although I see there is clearly a lot of cruise vessels being now ordered and being built, which is really good. But if you look at the content, our content, what we are normally contracted for, I would say it's stable, maybe with a little bit on the upside on the scrubber side.
And then the final one from me for now is just because you talked about MEPC and the timeline and the action. Now we obviously have some more volatility on the downside on the merchant segment in Clarksons data. I mean, do you feel when you go with the discussion with your clients on new build and retrofit, do you feel that momentum is strong enough to kind of look through the volatility here, or could that be a problem?
I think you need to look at, in my view, there is different characteristics in the different segments. I think for Wärtsilä's core segments, it is still a strong sentiment, and it is not changing. If you look at merchant, I would say there is a bit more of bulkers and the lower value vessels. There is a little bit wait and see. I would say that even in LNG carriers as well, with some customers, there is a little bit wait and see. When is SHIPS Act, how will that play out if you are considering trade to the U.S.? But for Wärtsilä and our core segments, it is still holding up, so to say.
Yes. Thank you. I go back in line, come back later with another one. Thank you.
Thank you, Sven. The next question comes from Panu Laitinmäki. Please go ahead.
Yeah. Hi, thank you. I have one question on related data centers. What is your kind of technical competitiveness in engines compared to turbines in the data center use? Basically it is more clear on the balancing side that the engines are more flexible, but is there like an edge in data centers or is it only about availability that because the customers cannot get turbines, they are looking into other alternatives like engines?
No. I would argue that there are more, and just to give a broader background for everybody, I mean, we talked about that a couple of years back. Data centers might require 5 MW, 6 MW, 10 MW, 11 MW, 12 MW or 20 MW, and they went to the utility and they said, "We want to hook up." They normally got access, and then they bought their own high-speed engines for the backup when the grid did not work. Now we see the data centers requiring hundreds of megawatts, and if they want to hook up to the grid, the utility will basically say, "We would love to serve you, but you need to get in queue and come back eight years later or five years later because we have a planning process, et cetera." Of course, that doesn't work for the data center developer.
They need now to get in place their own base load, so to say, their own base generation for the base load. This is where we come in, because now we're talking hundreds of megawatts, which is our sweet spot. So that's really good. Now, what is our edge compared to the aeroderivative gas turbines, which we will be and we are competing with? Energy efficiency. I mean, this is a base load application, and our energy efficiency is better. We normally have 48%, 49% close to 50% energy efficiency. The aeroderivatives, they are normally at 43%, 44%, something like that. Those percentage made quite a lot of difference in operating cost. Then the other area where we also have an advantage. The engines, they are modular and they are smaller in megawatts than the gas turbines.
For instance, if you want a certain power plant, you will have either five engines or two gas turbines. But with data centers, you need a very high availability. They are talking about the five nines, the 99.999%. So normally to provide that redundancy, you need to add an additional unit. You need to add an extra gas turbine, or you need to add an extra engine. But it goes, of course, without saying that three out of two is a much bigger number than six out of five, so to say. I hope I made it clear, otherwise push me back. The redundancy is actually favorable because of our modularity and that we actually deliver less power per engine, so to say. The energy efficiency and a competitive redundancy concept. Those two things I would put forward as some competitive advantages for engines.
Okay, thanks. Maybe a follow-up. Is this in this size that you have defined, was it 50 MW to 400 MW? So that is where you have the technical edge.
Correct.
Okay.
That is what we are targeting. Then you will read also, of course, in media about the gigawatt storage. They are there, and they will go for open cycle gas turbines or even for nuclear. We are not competitive there. But there are clearly in our sweet spot, there are clearly ample opportunities.
All right. Thanks.
Thank you, Panu. The next question comes from Mikael Doepel. Please go ahead.
Yes, thank you very much, and thank you for hosting the call and taking the time. Let me just continue briefly on the, since we are talking about the data centers here and the kind of the technicalities and the competition there. Just to understand it correctly, the way you see it when you think about your engines and you think about your sweet spot, which is the 50 MW to 400 MW. You talk about the turbines only, but if it is fair to say that, MAN and Cummins also do engines in that range. So, are not you competing against them as well? If that is the case, then how would you say that you are positioned against those particular engines? Just to understand that.
Just to calibrate. MAN is certainly a competitor, and they just changed name. The name is Everllence. They had a fantastic strategy of bringing big things to zero. Okay, you have to talk to them. So they are competitor. I see you smiling. So do I. Cummins, they are formidable company, but the engines they provide, they are smaller. So they are more high-speed engines. We compete with MAN, clearly. But we are clearly the market leader in engine power plants. If you look on the installed base, we are the big monkey on that block, so to say. Certainly in the U.S., we are clearly the dominant player. We are very well established in the U.S., not only from installation, but also from a service perspective.
Here, if I compare Wärtsilä and MAN on the energy side, we develop projects. We have by far the strongest service and MAN is there certainly, but they are definitely a smaller player. But we will be competing with them in data centers. Absolutely.
Okay. Well, that is clear because that was kind of my question. Also I think you have mentioned that you actually, the biggest opportunity you see within the data centers is actually to provide base load to data centers that might not necessarily connect to the grid at any point in time. Given the, well, as you mentioned, it is a scarcity of supply, essentially. Just as a curiosity, do we have any such examples out there already in the market where you would have, for example, an engine or a turbine not connected or planning even to be connected to the grid? Also, if you think about that being your kind of focus area, how big would you say the opportunity really is? Is it 1 or 2 or 3 or 20 or 100 opportunities?
Just to get a sense of what the opportunity really is there and if we actually have any concrete examples of this actually happening already.
If we take a step back and I come to data centers, but as you know, you probably know we are serving several industries with power solutions. So it's big mines, cement factories, et cetera. And this is a very typical situation. They are located right in the middle of nowhere. There is no power. So the application, the base load application, for an industry, we have done that for decades, and I think we know it fairly well. Now, it happens to be data centers. So we have a lot of application examples from other industries. Now, if we look at data centers, our first hundreds of megawatts of data center towers are being installed on Ireland right now as we speak.
As I said, there is a lot of activities and contracting for this type of data center power in the U.S., but we haven't reported any orders yet, as I said. What are the future opportunities? I don't know how to put it, but it's not the ones and twos and tens. It's more. But it's also, of course, a market that will evolve over time, so to say. So, it's a significant opportunity. It is. But it has been a kind of common theme for us in Wärtsilä the recent years. Also, when it comes to financial targets, you could say that we set certain targets, and when we do, we want to make sure we achieve them and have margins and growth, et cetera. Similar on data centers.
We've been very clear, we see interesting opportunities, but let's take it step by step and prove in action that we bring in the orders and then before we go out and make too optimistic forecasts. But there is a very interesting opportunity in data centers.
Okay. No, that's very helpful. Thank you. And maybe just one more before I get back in the queue. Just maybe as a clarification, really. So when in your opening remarks, you talked about storage and the challenges you see there in the U.S. But just to be clear, how big of a share is U.S. currently out of your total storage business? And then just a clarification, really. So I think you said that demand is somewhat picking up on a global level. But are you referring to really the global level, or were you actually referring to the U.S.? Just to be clear on that comment. Thanks.
Yeah. The demand is picking up on a global level, excluding U.S. I would say U.S. right now is at hold, basically.
Okay.
I am talking about countries outside of the U.S. And also, I am talking with strategically a little bit longer timeframe. Not the next quarter or the next year, but overall.
Yeah, of course.
It's a balancing power narrative with increases. Battery storage will be needed, thermal will be needed. Under that header, yes, it will grow. Right now, though, in the U.S., it's very slow because of the tariffs.
Okay.
How important is U.S. for us? That varies year- by- year, and I won't give any exact figures, but we are not dependent on the U.S. It's not like we have 90% of our business in the U.S. It's important for us, but we have other markets, Australia, U.K., others, where we are strong.
Okay. Clear. Thank you very much.
Thank you. The next question comes from Sven Weier. Please go ahead.
Yeah. A few more follow-ups, please. Maybe I'll just follow up on Mikael's question on storage, because it sounded to me like, yes, globally, it's picking up, but it's not enough to compensate the U.S. loneliness. Is that a fair reception on my side?
Yeah, overall, I think. In terms of us, first of all, first statement, this is a project business. Said it before. And the projects are getting bigger and bigger. Therefore, the lumpiness of the business is increasing. Therefore, when we make certain statements, and if you look one quarter or the next quarter, it can vary quite a lot. But in general, of course, U.S. is an important storage market. So if it falls away, generally, it's hard for us to compensate. However, if we all of a suddenly get the big project somewhere else in the world, it will compensate. So I'm just describing a dynamic, and I'm not saying that this is what's going to happen. But that's why it's a little bit difficult to make these general statements. But U.S. is an important market for us, but we are not depending on the U.S. markets.
For instance, Australia is also a very important market.
And you said it impacts the order intake, but you didn't say it impacts the backlog phasing, so you're not having any issues in actually generating the revenues out of the backlog.
I mean, so far
That's not causing you
Yeah. No. So far, I think we indicated one cancellation in Q1. That's it so far, so to say.
The other question I had was just following up on MAN or Everllence. I think because one of the statements they also made is that it's a core business for VW, so they're seemingly not going to get out of it. I know it's one of your M&A preferred ones, let's say. What other opportunities do you see in general, or do you always keep a certain amount of powder dry to be ready just in case VW changes its mind?
First of all, this is the obvious M&A opportunity if it will happen. It's not a big secret. If this would start to happen, we will take a look at it. Then of course, we have to consider, et cetera. But it's the obvious one. Yes, we do have a rather strong balance sheet, and that is by intention. I think also it serves us well in this era of uncertainties. I think, and we highlighted several times that, yes, we have had a very strong cash flow, which is encouraging, but it's not sustainable. Structurally, we've improved our capital efficiency, there is no doubt, but right now it's exceptionally strong.
A very final one from me today is just on Navy. We saw TKMS record backlog, but mostly driven by submarines so far. What's your exposure to below the surface? Is maybe for you more above surface vessels or is it also on submarines?
No, we are both above and under the surface. Maybe overall is less than 4% of our business, but there are growth opportunities .
Thank you.
Thank you, Sven. The next question comes from Louis [inaudible]. Please go ahead.
Hi. Thank you very much for taking my questions. I have two. First, on the energy division in the U.S. If you already have answered the question, I am sorry for repeat it. Can you please give more colors on the production capacity in the U.S., and especially on the lead time that you have compared to your main competitors, MAN Group? It will be my first question.
As I said, we are at 70%, 75% technical capacity, so we do have capacity. The lead times we are looking at right now are 12 months +.
Also for the-
And, just to-
because I find your global segment.
Hang on. Just to clarify also, there is no We do not have production of engines in the U.S. So we deliver from Finland to the U.S. market.
Okay, got it. The other question is more, if we try to project for the data center segment. You mentioned that you are benefited because the utilities cannot connect to the grids. For you, in the future, do you think the utilities will be able to do so? And should we think about your solution as temporary, or one they should diminish?
The planning cycle for utilities, they are normally longer. You are looking at five, six, seven, eight, maybe even 10 years. It would take quite some time for the utilities to come there, so to say. Some may be interested and some may not be interested. Is our solution a temporary one or not? No, because what I do think it is long-term. We do see customers that are even thinking about, I generate power for my data center, but I will also in the future, I will export to the grid. I will become a power producer to the grid. I will deliver also power to the grid. But there are many different business models in this. Different models for different customers.
In that case, if one of your customer wants to become a power producer, does that change the type of product that you are offering? Because the utilization of your engines are effectively very different.
Yeah. It depends, it is entirely up to the customer. Also how quickly the customer can get hooked up. There are some customers that they want to generate their power with the right reliability. They are surrounded by a weak grid, so immediately from the beginning, they see a business opportunity exporting. There are so many different variants, there is not one. The only general trend there is, there is a lot of data center customers that are looking for the hundreds of megawatts to get them into business.
Okay. Thank you very much. I will be back in the queue. Thank you.
Thank you. The next question comes from Tom Skogman. Please go ahead, Tom.
Yes. Hello. This is Tom Skogman. Since Friday afternoon, I think it is time for a bit of a stupid question. I just wonder why you have so low equipment margins given a high R&D spending to sales, very modern product and great market positions. Now I can note that you even say that customers just accept price hikes in the U.S. in power plants despite the EUR being much weaker and they accept tariff risks. So it just feels like your pricing policies, et cetera, is perhaps not state-of-the-art, if I may say so. How should I see this? That your customers suddenly just accept these big risks and price hikes, and then you over the years have very low margins on equipment.
Yeah. I do not think, first of all, we separate out our margins and equipment and services. I know you have been asking for many years, Tom, about our service margins, and we will still not disclose them. So I think if you look at the overall holistic business, you see that we are improving our profit margin in energy.
Yeah.
I think we are going in the right direction. Also, as I said on the questions, do we have opportunities for price realization under the current market circumstances? I think the answer to that is yes.
Yeah. This time I didn't try to drill on the service margin. It was more on the equipment margin. If customers accept big price hikes, it suggests that perhaps you over the years can be a bit more aggressive in pricing. Or is it so that you have had so weak markets that you have been forced to use pricing and you see that you go out of that period somehow. We know that will be different the next five years.
I think that we certainly had that a couple of years back, but we are out of that for quite some time, I would say.
Yeah. Then a different, perhaps more serious question. Service contracts. So how long can they be? And how long are you happy to sign? I just wonder about all these kind of clauses. To get customers to sign something where you have loads of clauses might be tricky and it's also difficult to have clauses for everything. The world is such an uncertain place. So how should we think about this?
Yeah.
Can you have some kind of open if things happen like force majeure in these clauses as well?
Yeah.
Or how do you protect you?
Yes. On service agreements, referring back to the service value ladder, we have the spare parts on service agreement. We have a broad array of service agreements. We have the retrofit projects, and the first fourth is the performance-based agreements. If we start with agreements, the second step of the ladder, we have quite a few different type of agreements, and they can be yearly or a couple of years. And normally they are price adjustment mechanism for inflation and other things. I think from that risk perspective, we are rather well covered. The performance-based contracts, the fourth step of the value ladder, they are normally 5-10 years, and they are certainly, we have mechanisms for inflation and currency fluctuations, et cetera.
I understand that, but to have like a general CPI, for instance, 10 years ahead. Your own cost in a certain city or for certain steel grades or whatever,
Yeah
can be something very different from what you write into a.
Yeah
CPI agreement, basically.
Yes. But I think so far, you are right. I am not challenging on that, but I think what we have seen with some of our long-term agreements that we have run now for quite some years. They serve our customers, they are happy about them, they prolong them, and we make good money. We share some of the value with our customers. So it is really working out. And it worked out through the high inflation periods. We all remember two or three years back. We have several indices in these type of agreements, and so we are rather well covered.
Do you have any kind of force majeure clauses so you can walk out of it if it really turns into a loss-making contract somehow?
Well, there is not one type. Some of the contracts, like the before. We have skin in the game, so we make commitments and if we do not make those commitments, we have downside. It is part of the setup. But so far, we have been successful in managing those contracts to the benefit from the customer and also the benefit from us. So from that perspective, the service, certainly the performance-based agreement, there is operational risk clearly. But this is for us to manage and make money from. And so far, we have been successful in doing so.
Yeah. Just finally on this topic, how large share of service sales comes from contracts that are more than one year, basically?
I would say the vast majority.
Okay.
Yeah.
All right. Thank you.
Thank you.
Thank you, Tom. The next question comes from Max Yates.
Thank you. Just one quick final one. Just when you talk about the new regulations coming in the MEPC 83, could you just walk through how you initially expect it to affect your business? Because I guess we've had other regulations come in where I think the response to the ships was just to slow down a bit, invest a little bit in the hulls, and there was no real obvious benefit for your business. So just if we think about maybe the sort of one year, three year, five year of what customers are likely to do in response to this, how do you think they will behave and which bits within that process are the biggest opportunities for Wärtsilä?
Yep. So let's talk about newbuild and then let's talk about retrofit. I said this many times, when you look at our two industries, quarter on quarter or even year on year, it's a rather short time. You need to look at this on a five-year time horizon, five even 10-year time horizon. If the decision is taken, the new regulation will kick in and get teeth in 2028. We might think that this is far away in the future, but in marine, the lifetime of a vessel, 25 years. So that's the kind of time frame. That also triggers action right here, right now. Because if you're building a vessel today, it's going to be around for 25, 30 years. During that time period, a lot in this area will happen. Owners recognize that.
I think many owners, I'm not saying all owners, but many owners, they are thinking about fuel flexibility. Because that's a, you can basically, you're buying insurance. Because what you don't want to have is stranded assets. So that's why, and we talked about it before, in 2023, IMO introduced the Carbon Intensity Indicator and others. We already then saw how that changed the strategic thinking of many of our customers, so to say. That will be even further emphasized with whatever comes in place now in October. But it won't shift from one year to the other, clearly. But if you look at this from a five to 10-year perspective, there's going to be some major changes. It will be so-
Could I push you on that? In five years' time, what percentage is ordered as dual fuel today, and do you think it will be a case where almost all ships in 2028 are ordered using dual fuel in five years or how do you think that evolves?
I would say from our side, the vast majority of the engines ordered today are dual fuel. I do not know what the exact percentage is, but it is the vast majority. It is not 100%, but it is the vast majority. What will change a little bit over time, people will start to add ammonia. Right now we have sold one ammonia. There will be new fuels coming in under this multi-fuel umbrella, so to say. How that will evolve and how quickly, I do not think anybody knows. We do not know. That it will happen, it will happen, absolutely.
On the retrofit, yeah.
For us, as you know, even for the customers, let us say that chose a more conservative route, they are going to go with LNG. They will go with one of the fossil fuels, and it will likely be LNG. We are very strong on LNG engine as well. We are a little bit hedged from that perspective.
Sorry?
No. I said, we certainly have in the technology diffusion curve, the technical one, when you have forerunners and you have the big mass and laggards. Even with those conservative laggards, they will still be looking at fossil fuels, and they will be looking at LNG, and we are very strong on LNG. From that perspective, we are strong in the future green fuels. We are strong on the current fossil fuels. We continue to develop our engines to reduce methane slip, et cetera. From that perspective, we are a bit hedged technology-wise.
Okay, fantastic. Thank you very much.
Thank you, Max. Currently, I do not see any hands up. If you have still questions, we have time for one question. Mikael Doepel, please go ahead.
Yeah. Very briefly, actually, on the same topic and maybe more specifically, I was thinking about biofuels and biodiesel in particular. What is your view on the potential there? How easy are they to be applied? I think for LNG, it basically can just be as a drop-in. What about the heavy fuel oil engines? What is the potential there? What does that mean for your retrofit opportunity? Do you see capacity constraints in biodiesel as well?
You can run the current engines on biofuels because the engine doesn't know to make a difference between a biological carbonate or more synthetic carbonate. Biofuels is a blend in fuel already today. If you look at MEPC 83, as I said, it's complex, it's a step in the right direction. But our early analysis, looking at the fee structure, it will make it even more beneficial in the earlier phases to focus on biofuels. The key challenge for biofuels, and I would say for all the green fuels, is availability, because both marine and energy consume a lot of fuels. But I think we will see a renewed interest for biofuels considering MEPC 83 because it's pretty favorable under MEPC 83. For us-
It's basically the availability.
For us, our engine is ready. We are ready to go.
Good. Thank you.
Thank you all. The next call will be hosted on June 18th. We will publish Q2 results on July 18th, and I wish that the summer will be warm and sunny, and we all have some time to enjoy it. Thank you.
Thank you, and have a nice weekend.
Thank you, and you.
Thank you very much.
Thank you very much.
Bye